Build or burn?

Part one (scientists) covered the personality barriers that get in the way of R&D investment, but that’s the easy bit. It is, after all, just a communication thing. The hard part is coming up with a way of managing R&D that achieves better results than leaving things to chance alone (which, by the way, is a perfectly respectable strategy).

Business people tend not to think of R&D in the same way as other high-risk investments. Instead they think of R&D as a cost-centre, something to be paid grudgingly as the price of keeping up with the competition. Exactly the same people that crack jokes that 50% of their marketing spend is wasted but they don’t know which 50%, would not find it funny to overhear a scientist talk about their research projects in the same way.

With certain types of ‘revenue’ investment – marketing is the most obvious, but IT and HR could be put in the same bracket – business people don’t worry about the risk of losing money in the same way as they do with R&D. Spending in these more familiar areas is an act of faith. You either share that faith, or you don’t. Few business people have faith in the R&D gods.

Scientists are not helped by the fact they grow up in an academic environment where the main source of work is a no-strings commitment from a government or charity to pay for three years’ work, with nothing more expected at the end than the results are published. Scientists talk ‘funding’ while business people talk ‘financing’. To business ears the word ‘funding’ sounds open-ended and ‘soft’.

In the cost-centre mindset, R&D is a burden, a source of problems and something to be kept at arms length, separate from the mainstream business. Expenditure is a sideline: a vague hope that something interesting might come out of it.

In the investment mindset, R&D is something with a definite start and end date, and subject to exactly the same financial rigour of any other type of investment. Money is doled out on condition of achieving milestones independent of annual revenue budgets. Occasionally, whole divisions of a business might be mobilised towards achieving an R&D objective: think Steve Jobs assembling the iPhone team at a cost of $150m over 3 years.

Scientists say you can’t turn R&D on and off like a tap. What they mean is they don’t like the job insecurity it creates. But here’s the thing. The best academic institutions in the world achieve their status by making the early-career academic life extremely insecure. You either succeed or you’re dropped. Why should it be different in companies.

Scientists will argue that you can’t manage R&D in the same way you can other investments. It’s too long-term, too uncertain. Don’t believe them. Exactly the same scientists will aggressively pitch to venture capitalists for millions of investment finance for their technology start-up.

Each of the following ways of managing innovation can work perfectly successfully on their own, or blended together in combination:

1) Steal with Pride. Don’t bother with R&D at all. Leave it all to universities or higher-margin businesses. When something new arrives on the market, quickly mobilise a team to copy it, license it, or acquire the company that invented it.

2) Corporate university. The opposite on the first option. Make a long-term commitment to have a permanent research capability such as a large, centralised team of boffins. Your difficulty will be firstly, in getting them to understand what you want, secondly in integrating any bright ideas they come up with into a mainstream business that didn’t invent it, and lastly, preventing old, dead projects being resurrected under a new name to keep people in a job.

3) Skunk works. Parachute a bunch of mavericks into a corner of your business or factory and tell them to impress you. Shut it down if they don’t.

4) Corporate Venturing. A ‘City-boys’ version of the skunk works. Bring in some private equity / venture capital types and get them to manage your R&D portfolio as they would any investment fund of high-risk ventures. Sack them if they fail to earn a ‘since inception’ internal rate of return of 13.5%.

5) Business Development. A more mature version of the skunk works. Form a department of creative, intelligent types, the most enterprising people you can find, and invite them to come with new business ideas. Your difficulty will be avoiding the department being colonised by your marketing department or, worse, ‘strategy’ types with none of the hard skills of getting things to market.

6) Outsource. Manage R&D like a marketing department. Decide in advance how much of a % of sales you can afford to invest and adjust investment each year accordingly. Outsource all the creative, leaving in-house R&D to brief the consultancies and manage their work.

7) Project Management. Periodically mobilise teams from a permanent cadre of in-house staff and manage them using the same project management principles as you would, say, if building a bridge. Plan how you will de-mobilise them between projects.

8) Keep your friends close and your enemies closer. Decentralise your R&D, putting them on the factory floor, so to speak. Don’t expect any deep skills or breakthroughs to emerge, but you should get faster-response development.

9) Partnership. Enter long-term relationships with key professors at the top universities. Be careful they don’t pick your pocket though; universities are good at that.

10) Put a maverick in charge. You need someone who is entrepreneurial enough, persistent enough and resilient enough to push ideas through the natural inertia of the rest of your business, through sheer force of their personality. Not so entrepreneurial that they can’t fit in within a large corporate culture however.

In all the models mentioned here, you must – above all – kill bad ideas quickly. Lack of ruthlessness, as I’ve posted elsewhere, will gum up any innovation process.

None of the models offered above will, on their own, ensure a steady stream of innovation. No ‘process’ can do that. Only exceptional people can do that. The trick with innovation is capturing, mobilising and encouraging talented people and for that you need skilled leadership. Yeah, I know. It’s like any other aspect of business performance. There’s no easy formula and it depends on people.